I am quite sure that the three letters PVH do not ring a bell by most, compared to the brands this company owns such as Calvin Klein & Tommy Hilfiger.
After going through the financials myself, I thought this is an analysis worth sharing. Feel free to disagree with me, add additional insights, and provide feedback. Let's get started!
What is PVH?
In a nutshell, it is an apparel company that owns quite some brands. However, Calvin Klein & Tommy Hilfiger are the key ones as they contribute over 90% of the total revenue. The main activities the company undertakes are in the area of designing their new products as well as marketing. The manufacturing is outsourced which could be seen as a risk if import tariffs between certain countries significantly change.
The financials
The company's revenue didn't significantly change in the recent past. It grew from $8,2b to $9,9b in 2019 prior to the pandemic, then it decreased to $7,1b and now is close to $9b.
Since 2016, it grew by an average 2% year over year. This indicates a fairly mature company with limited growth ahead.
In the period between 2016 and 2022, the gross margin improved from 53% to 59%. This is amazing, however, the remaining operating expenses (SG&A) grew from 45% of revenue to 49% of revenue.
This leads to a marginal improvement of the operating margin that has been fluctuating between 8 and 10% (2020 being an exception due to the pandemic). The company's currently generating an operating income of around $900m a year. Its market cap is $3,65b.
Management's guidance
Looking into the historical numbers, it is quite clear that we cannot expect a significant increase in revenue or operating margin. On April 13th, 2022, during investor day, the management provided some guidance for FY 2025, targeting:
– Revenue of $12,5b
– Operating margin of 15%
Knowing that this company has profitability similar to 5 years ago, it is difficult to include the management's guidance into my valuation assumptions as the company hasn't proven that it can deliver (yet).
The balance sheet
There are 3 main points regarding the balance sheet:
- They have great inventory management, with no significant excess in any given year.
- The debt has been reduced by $900m in the last 5 years.
- The shares outstanding have decreased from 77m to 67m.
So, we have the exact same company (in terms of profitability), with $900m less debt & 13% fewer shares outstanding. Yet, the share price today is 57% lower than it was 5 years ago!
The company has new CEO since the beginning of 2021, so it is not yet clear whether the company's strategy will continue in paying down debt & buybacks or if there's another plan in mind specifically focused on growth (revenue/margin)
The key assumptions about the future & valuation
Personally, I do not want to include future potential and any wishful thinking. So in my DCF, I have the following:
– Revenue growth of 0% for the next 12 months followed by 3.2% (same as the risk-free rate today)
– Operating margin of 9%
– A discount rate of almost 8.8% (WACC-based)
If they deliver better results, then great! Until then, I'll be conservative with my assumptions.
Based on these assumptions, the fair value of the company is 4,2b ($62.87/share)
The current market cap is $3,65b ($54.58/share)
Note: I have taken into account the cash, debt, and deferred taxes on their balance sheet as well as the outstanding equity options.
What if my assumptions are significantly wrong?
Based on the assumptions above, the revenue will grow by 33% in 10 years and the operating margin will be 9%.
I am aware that my assumptions could be significantly wrong. So, let's take a look at how the value of the company (per share) will change based on different assumptions regarding the revenue 10 years from now and the operating margin:
| Revenue / Op. margin | 8% | 9% | 12% | 15% |
|---|---|---|---|---|
| 0% ($9,1b) | $49.0 | $60.7 | $92.7 | $124.8 |
| 33% ($12,0b) | $49.5 | $62.9 | $102.5 | $142.2 |
| 50% ($13,5b) | $49.7 | $64.1 | $108.0 | $152.0 |
| 93% ($17,4b) | $50.0 | $67.2 | $121.6 | $196.1 |
The table illustrates how important is for the company to decrease the SG&A as % of revenue and improve the operating margin.
In the first row, the revenue of 0% is based on a scenario where the company remains as is today, with no future growth in revenue at all. If that's the case, it'll deliver $400-$500m free cash flow per year.
The second row is based on my assumption (regarding revenue growth)
The 3rd row is somewhere between my assumptions and management's guidance.
The 4th row is based on the management's guidance.
If the management delivers the 15% operating margin & revenue growth, the fair value today is almost $200! That's over 3x today's price.
Can they deliver? It is possible, but there's a very low probability of that happening.
The risks
I personally see two main risks:
- The risk of recession where the demand for their products significantly decrease
- The introduction of new tariffs that have an impact on their profitability.
What are your thoughts on PVH, its brands/products, and its valuation?
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